Will the Market Recover Quickly From Its Nasty
Spill?

T he stock market ended a brutal week on a brutal note, as the Dow Industrials fell 266 points Friday to finish at 10,019, down 630 points, or 5.9%, in the five-day span. It was the Dow's worst weekly point drop ever and the steepest percentage decline since October 1989, when the collapse of the United Air Lines leveraged buyout prompted a 7.8% weekly drop in the index.

Shareholder confidence was pummeled by several factors, starting with
Intel's
disappointing profit announcement Tuesday and ending with the sharpest rise in producer prices in nine years, reported Friday morning. Federal Reserve Chairman Alan Greenspan didn't help matters with his comments Thursday night, suggesting that investors should carefully consider the risks of investing in today's stock market. Friday the Dow briefly dipped below 10,000 in intraday trading for the first time since April, but managed to close above that key level.

The week's slide left the Dow 11.5% below its high for the year, reached on August 25, a tad more than the 10% level that constitutes a correction by most definitions. For the year, the Dow remains up 9.1%. The Standard & Poor's 500 Index, the benchmark for professional investors, fared worse on the week, tumbling 6.6% to 1247, erasing nearly all its gains for the year. The S&P now reposes 12% below its July high, and it's up a mere 1.5% on the year.

The Nasdaq, which on Monday celebrated a new high of 2915, ended the week down 5.7% at 2731. For the year, the technology-heavy Nasdaq is still ahead, by an impressive 24.6%.

"A lot has changed since the summer highs," says Byron Wien, domestic strategist at Morgan Stanley Dean Witter. "People now think that inflation isn't dead. The economy is strong. The dollar is weak, and rates may be going still higher."

Wien says the big question is whether the Dow and S&P 500 will quickly bounce back to their summer highs. In both 1997 and 1998, the two averages suffered major swoons during the early fall but rebounded sharply to end the year with strong gains. Wien believes that this time, any recovery will come more slowly because the rate backdrop is less favorable than it was a year ago, when the Fed eased monetary policy to avert a potential financial meltdown stemming from the financial crises in Russia and other developing countries.

"The problem is Alan Greenspan," says Charles Pradilla, strategist at SG Cowen. "He seems determined to take the market down to avoid a Nikkei-like bubble in 1989. He controls the money and can change the rules. Greenspan is like a stern uncle scolding kids who are playing too hard and fast."

Others believe the stock market has suffered enough already and that values abound outside the favored technology stocks. "There's a lot of opportunity across the entire market," says Bill Miller, manager of the top-performing Legg Mason Value fund. "People have been mesmerized by the few names that have performed spectacularly. Many of the stocks we look at have good prospects, earn good returns and trade for 12-13 times earnings or less."

Miller points to the battered group of health-maintenance organizations, including
Aetna
,
United Healthcare
and
Wellpoint Health Networks
"The litigation risk to the HMOs is way overblown," he contends. Aetna, at 53, has slid 30% in the past month, amid fears that potential federal and state legislation will spur a rash of suits against HMOs. Aetna trades for less than 10 times projected 2000 profits and has an even lower multiple when valued on its "cash earnings" that include goodwill amortization. Miller also points to the battered financial sector. He cites such stocks as
Bank One
, which is down 36% this year to 32 11/16 after a three-point decline last week, and
Washington Mutual
, the largest thrift in the country, which is off 29% in 1999, to 27 5/16, after a four-point slide last week. Bank One fetches about eight times projected 2000 profits.

Many value-oriented investors are frustrated that bank stocks and other low-P/E issues have underperformed since the major averages peaked this summer. "I can take it if I underperform in a frothy market, but it kills me to lag in a declining market," says one manager.

F inancial stocks got pummeled last week with bank, brokerage and insurance stocks down an average of more than 10% as rates continued to rise. The Treasury long bond finished the week at a yield of 6.25% after hitting a two-year high on Thursday of 6.32%.
American Express
declined 14 11/16 to 135.
Citigroup
was off 4 7/16 to 42 1/8 ;
Morgan Stanley Dean Witter fell
7 1/8 to 88 1/8 and insurance giant
American International Group
(AIG) was off 12 3/16 to 82.

A key index of 24 major bank stocks is off 21% since June 30 and down 12% this year. Only two of the 24 stocks in the bank index are higher this year: Citigroup and
J.P. Morgan
. Morgan, however, has gotten slammed lately, dropping 12 7/16 to 105 11/16 last week ahead of its third-quarter profit report Monday.

The insurance sector has been a disaster this year, suffering its worst bear market since 1990, as such major companies as
Allstate
,
Progressive
and
Chubb
have experienced profit shortfalls. "I just got off the ledge of the building," joked one insurance investor last week. Property and casualty insurance stocks are down an average of more than 30% this year, and life insurers are off about 20%.

The only major insurance stock that has risen this year is AIG. Life insurance stocks have declined sharply lately despite their potential allure as takeover targets now that Congress is set to break down the 60-year-old barrier that has prevented banks from owning insurance companies. Some major life companies include
Lincoln National
,
Protective Life
,
American General
and
Reliastar Financial
.

I t's funny how significant market events occur on the same dates. The Dow peaked on August 25, the same date as its 1987 high, while the S&P peaked on July 16, the same date as its 1990 peak. It'll be interesting to see if Tuesday, October 19, the anniversary of the 1987 market crash, turns out to be the bottom of the current market slide.

T he declines last week were broad and deep, affecting virtually every sector of the market. About the only groups to register appreciable gains were the oil exploration and service stocks, which had been battered in the prior month.

Following last week's losses, only about 200 of the 500 stocks in the S&P are ahead this year. On a bullish note, the so-called VIX index, which measures the implied volatility of index option prices, has surged lately to above 30% from around 22% in early October, as investors rush to purchase put options as protection. A sharp rise in the VIX often signals a market bottom.

I n the technology sector, Intel fell 4 13/16 to 70 7/8 after reporting operating profits of 55 cents a share in the third quarter, two cents below the consensus estimate. Intel was upbeat on the fourth quarter, but recent news from such tech companies as
IBM
,
Hewlett-Packard
,
BMC Software
,
Ceridian
,
Unisys
and others suggests that a slowdown in orders related to Year 2000 and other issues could be worse than anticipated. There were even rumors last week that some companies may simply give up on the fourth quarter and try to push revenues into the first quarter of 2000.

Sun Microsystems
provided an antidote to some of the recent bad tech news by reporting strong results Friday. Its shares were unchanged on the week at 92 9/16 after rising three points Friday.
Microsoft
was off 6 7/8 to 88 1/16 ahead of its quarterly profit report Tuesday. The consensus is for earnings of 34 cents per share, up 21% from the 28 cents a year ago, but some think the number could be as high as 36 or 37 cents. Judging from history, Microsoft will likely beat the consensus.

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